What’s Next?
August 24, 2015
On Thursday of this past week I had outlined what I thought was a good “weekly”. It was centered around an observation from a recent beach trip involving a little girl screaming frantically for her mother and looking for someone to help her. That little girl’s scream for help transformed itself into investors’ screams for help on Friday as the market experienced one of its worse one-day sell-offs ever. Following a week or so of uncertainty surrounding China and its economy, global investors finally acted with vengeance sending all the equity markets down. For the week, the DJIA was down 5.82% and the S&P 500 was down 5.77%. The source of all the fear was a slowdown in the Chinese economy and how that would affect all of the emerging markets. We have waited and waited for an elusive 10% sell-off in the market and after Friday’s global move we have it. The DJIA is now down 10.3% from its high but the S&P hasn’t hit the down 10% level just yet, and is only down 7.6% from its high. The key question is what’s next?
It has been a while since we investors have had that sinking feeling of dread following a bad week in the market. Last year was one of the least volatile periods in recent history, but as I look at a market down 500 points in one day like this past Friday, I scratch my head wondering why and, more importantly, how do I feel about what just happened? Following the financial crisis we have been in a one-way, upward moving market. The reality is that during that move several issues may have caused many investors to take risks with which they are uncomfortable. There is no doubt that the long protracted period of ultra-low interest rates has caused many income-driven investors to seek returns outside of their comfort zone. These traditionally conservative income investors would prefer to have had their money in bonds or bank cds, but low interest rates forced them into higher-returning alternatives like stocks. I question the commitment and staying power of this investor group as the market becomes more uncertain.
In times like last week, the strength and resolve of all investors get tested. There are many positions of stocks that are being held by “weak-handed” investors. A weak-handed investor is someone that is not really comfortable with their portfolio’s inherent risks. No one knows what the near term holds. If the market is going to continue to be volatile, investors should not panic but they should assess the level of risk and exposure to stocks with which they are comfortable, and adjust their portfolio to that level of comfort. Market risk is difficult to gauge but no one knows your comfort level on risk better than you.
Carl Gambrell
